The debate about energy efficiency is gathering pace, accelerated by COVID-19. Empty or partially occupied buildings are costly to heat and maintain, and the focus on net-zero targets has concentrated minds. That's inspired a plethora of targeted blogs, some with leading headlines like Will Heat Pumps in Commercial and Office Buildings Save the World?1
It is emotively framed, but the question is a good one. Before the pandemic, 28 per cent of all carbon dioxide (CO2) emissions came from the built environment, according to the International Energy Agency.2 Demand for energy for heating and cooling and other plug-ins was growing much faster than efficiency and decarbonisation measures were cutting it.
“If we are creating and using more and more energy, what will it mean for the planet?” asks Rick Stathers, senior environmental, social and governance analyst and climate lead at Aviva Investors. “The fundamental laws of physics suggest we cannot continue to grow energy demand without wider implications. Just as we assume we can have economic growth ad infinitum, are we also working under the assumption we can have energy use growth, ad infinitum? This is an area where we need to check our behaviour.”
Pathways to decarbonise heating
So, how can we cap energy appetite and decarbonise heating, one of the knottier problems on the path to net zero? Substantial progress has been made in many other areas, but this is one where large-scale change is yet to arrive.
Take Germany, for example. It is dealing with the legacy of a tax environment that has been light on heating oil. Independent think tank Agora Energiewende says there is a need to fundamentally transform the approach. It recommended large cuts in total energy consumption, phasing oil out entirely for space heating and a major drive to speed up the installation of heat exchange systems.3 That call has been followed by policy moves to boost wind power and hydrogen, along with specific funding for fuel cell heating.4
Meanwhile, in the UK, pressure to increase the use of heat exchange systems is building (see Understanding heat pumps). Installations are currently running well behind European neighbours, partly due to the UK’s well-established gas distribution network. To achieve net zero, methane needs to go5 and, as more than 80 per cent of households currently use the main gas grid, this is a major challenge. Once again, heat pumps are a potential solution.6
“Heat pumps, powered by increasingly low-carbon electricity, offer the potential to provide heat efficiently most of the time, with hydrogen boilers contributing mainly as back-up to meet peak demands on the coldest winter days,” said the UK’s Committee on Climate Change (CCC) in 2018.7 Fast forward: the UK is targeting a 30-fold increase in the number of heat pump installations each year from today’s level, by 2028.8
But there is still a perceptual mountain to climb. Markets like France, Italy and Spain have seen sales growth in the double digits, which has led to bullish ‘what if’ scenarios from the heat pump industry. What are the earnings opportunities if all markets scale up? At the moment, heat pumps are perceived to have ‘no advantages’ or ‘limited advantages’ versus natural gas heating in UK research.9 So, why change?
Figure 1: Appetite for heat pumps: European leaders and laggards (in 000's)
Source: Thomas Nowak, ‘European Heat Pump Association market report and statistics outlook 2019’, Statista, June 24, 2019
Harnessing ambient energy
In fact, heat pumps offer important benefits. Most significantly, one unit of (applied) electricity can result in between one and a half and three units of useful energy. This is possible because of the way ambient energy is harvested: there is no need for combustion to take place. The precise amount of energy depends on the differential between the heat source and its destination and how the system is designed.
Combined with effective insulation, total energy use and CO2 emissions can be reduced and a comfortable environment created where indoor temperatures do not fluctuate dramatically day to day. It is not all good news, though: heat pumps give out steady heat, so they cannot respond swiftly in cold snaps. Environmentalists also flag the climate warming potential of some materials used in chemical refrigerants, greater per unit than CO2.10
Figure 2: Europe: Final energy savings from 11.8 million installed heat pumps, 2005-2018
Source: Thomas Nowak, ‘European Heat Pump Association market report and statistics outlook 2019’, Statista, June 24, 2019
“Overall, heat pumps are a good technology; they work very well in the right property and in the right circumstances,” says Martyn Bridges, technical director at Worcester Bosch, a company that has produced heat pumps commercially for twelve years. “They can be installed in most properties; generally, the most suitable sites are new builds, properties that are being heavily renovated, and larger-sized properties. You need adequate insulation, and the radiators or underfloor heating system need to be correctly sized for the lower temperatures a heat pump runs at. Typically, a conventional gas boiler runs at between 70 to 80 degrees Centigrade (C); a heat pump runs at between 40 to 50 degrees C, so the radiators need a larger surface area to warm the room.”
Energy options and trade-offs
The system requirements can be accommodated easily in new builds and large re-fits, but generate issues in older, occupied buildings.
You quite often need to replace the entire heating system, not just the boiler
“Converting involves taking existing boilers out, finding a new location for a hot water storage cylinder and most of the time changing the radiators to larger ones,” Bridges says. “Quite often, the pipework supplying water to the radiators needs to be changed too, and that might mean accessing pipework under the floors. The pipes need to be of larger diameter, because a heat pump works at a higher velocity flow than today’s gas boilers. In our experience, you quite often need to replace the entire heating system, not just the boiler.”
Commercial developers and property managers are increasingly aware of these issues, driven by European regulation and benchmarking.
“We are at a point where no developer would reasonably spec a large new building reliant on gas,” says Ed Dixon, head of ESG for real assets at Aviva Investors. “If you did so, you would quite rightly be penalised for the building’s carbon impact. But there is still an issue with refurbishment. Because the gap in price between an air source heat pump and a standard gas boiler is quite large, and because there is no mechanism to offset that cost or amortise it, it can be a significant enough hurdle for people to say: ‘It looks too complicated or too expensive.’ So, people are being tempted to just kick the can down the road. Refurbishment cycles come at intervals every five, ten or 15 years. If we install gas boilers today, we are responsible for perpetuating the problem.”
Nevertheless, in consumer trials, the dislike of disruption is proving a dampener even when heat exchange systems are offered at low or zero cost. There are various schemes to help pay for the installation of a heat pump, such as the recently extended UK Green Homes Grant that offers a £5,000 payment to exchange a conventional gas boiler for a heat pump. The scheme has been criticised, with only 155 heat pumps installed country-wide by February 2021.
There is still a cost differential between what is needed to support the pump and the cost of a standard replacement boiler
“Unlike a boiler that is mostly purchased because the existing one has failed, a heat pump installation needs to be planned and any remedial work undertaken before the heat pump finally takes the place of the boiler,” Bridges says. “There won’t be much appetite to do this in the winter months, and there has been COVID-19 to contend with as well. Even with the subsidy, there is still a cost differential between what is needed to support the pump and the cost of a standard replacement boiler.”
“Heat pumps are proven and deliver useful heat efficiently, but those are not the only considerations,” Jaime Ramos Martin, global equities portfolio manager at Aviva Investors points out. “If you take a nation like France, which is highly electrified and the gas grid is less developed than in the UK, it is comparatively easy to make the psychological leap to an electric heat pump. In the UK, the main gas network is well developed and a lot of the housing stock is old. There may be more barriers and greater reluctance to make that initial investment.”
Ramos Martin believes take-up of heat exchange systems will be strongly influenced by these local factors in the short term.
Network capacity is also an important consideration, as electric heat pumps will inevitably ramp up the load on the grid. “This is an issue, but remember we have a lot of renewable assets that are being curtailed,” says Jolanta Touzard, director of infrastructure at Aviva Investors. “If we have a surge of demand from electrification, you could release that curtailment and put these assets to fuller use. The problem then is: what time do you do this during the day? Wind and solar do not generate electricity consistently, so it is likely that energy storage will have to be enhanced via reliable batteries or other means, such as hydrogen. The issues need to be addressed in a systemic way.”
So much depends on where the electricity originates to drive the pump
Heat pumps have the potential to trim energy consumption, but the savings vary. It is near impossible to draw any broad conclusions about conversion costs and payback periods because of site-specific factors. The same is true when it comes to assessing carbon impacts: so much depends on where the electricity originates to drive the pump in the first place and whether there is effective insulation to slow any subsequent heat loss.
“In my view, the future for buildings is electric because they are connected to the grid already,” says Sam Carson, director of sustainability at Carbon Intelligence, a consultancy that advises companies on how to reduce their carbon footprint. “The challenges lie in how to upgrade heating systems and perhaps the whole fabric of the building in a way which is economically viable. The whole process may take some work, but there is no question about the destination.”
Hydrogen for space heating
Meanwhile, progress is being made on the other leg of the policy proposed by the Climate Change Committee: utilising hydrogen for heating buildings. This is a nascent approach; the idea is that if the gas in the existing grid is made greener, it could offer a low-friction route to decarbonise. It is possible to implement this by introducing hydrogen into the fuel blend, initially with a 20 per cent mix, with the prospect of increasing that percentage in the future. For those off-grid, there is also potential to generate hydrogen in smaller-scale heat networks.
Investors will only get involved if there is much greater clarity over the business model and certainty over future revenues
“For green hydrogen to be produced at the scale needed to replace natural gas used for heating, demand has to meet supply,” says Touzard. “The two parts of the equation cannot grow in tandem if there is no financial and policy support for producers and off takers of green hydrogen. Professional investors will only get involved if there is much greater clarity over the business model and certainty over future revenues.”
Touzard points out the timeline for commercial wind developments to evolve from ‘new’ to ‘mainstream’ took around seven years. Despite the opaque situation today, energy consultancy Aurora anticipates a meaningful amount of buildings heated by hydrogen across Europe by 2050, shown in low-and high-growth scenarios in Figure 3.
Figure 3: Europe bottom-up hydrogen forecasts, including low- and high-demand scenarios by 2050, TWh H2 (HHV) per year
Note: Europe includes the 30 countries in the European Economic Area and Switzerland. Demand includes all types of hydrogen; Heating includes district heating and gas heating. Other includes small and medium scale industries. ‘Europe’s Hydrogen market: Where’s hot and where are the biggest regulatory barriers?’ Aurora Energy Research Ltd, January 21, 2021
In the UK, progress is further advanced for hydrogen distribution at a network level than many realise, mainly because the grid upgrade began before the hydrogen conversation gathered pace.
“Before hydrogen was mooted as an alternative fuel, there was a pipework replacement programme that started around 10 years ago,” Bridges says. “It’s due to finish by 2032. Ultimately, the whole gas grid, all 136,00 miles of it, will be made of polyethylene pipework, which is suitable for the transportation of hydrogen. We are 60 or 70 per cent of the way there already.”
Extensive trials and safety tests are now on. Regional gas operator Northern Gas Networks has already built a micro-grid on a site in Cumbria, which will ultimately replicate the whole of the UK network.
“We also have a street in Middlesbrough where houses were demolished years ago, but all the underground infrastructure is still there. We will be using it to carry out 100 per cent hydrogen trials by mid-2021,” says Tim Harwood, Northern Gas Networks’ hydrogen lead. “We’ll be looking to convert the network to 100 per cent hydrogen and carry out repairs and extensions in a live scenario, and people will be able to come and have a look.
“We’ve been targeted by the government to have a hydrogen town ready by the end of the decade,” he adds. “We think we can deliver it sooner than that, at a push. Within the next five years, we are looking to have thousands of buildings running on 100 per cent hydrogen.”
This implies the cost curve might change quite radically; at the moment hydrogen is not competitive for space heating, as the analysis below shows.11 (More background in Hydrogen: Back to the future).
Figure 4: Will hydrogen be competitive for space heating?
Source: ‘Path to hydrogen competitiveness: A cost perspective’, Hydrogen Council, January 20, 2020
In current trials, prototype heating appliances from Worcester Bosch stand up against existing methane boilers. “The thermal efficiency of the boilers running on hydrogen is about the same as it is on natural gas,” Bridges says. “But we also have zero CO2 emissions, no carbon monoxide and lower nitrogen oxide emissions. These are inherently safer appliances.”
The government may put in place a policy that states only hydrogen-ready boilers can be sold from 2025
Might hydrogen-ready boilers therefore be another growth area? “The government has its calculators running,” Bridges says. “There are about 1.7 million domestic boilers sold in the UK every year. There is a chance they may put in place a policy that states only hydrogen-ready boilers can be sold from 2025. After ten years, they would have 17 million homes hydrogen-ready. After 15 years, they have 22 or 23 million homes ready to go, and it has not cost them a penny because the homeowner or housing association would have to change the boiler anyway. It’s like HD televisions. You could buy the TV before you had a programme to watch.”
Nevertheless, Harwood acknowledges that in the early days, any hydrogen supplied will not be green (i.e. produced from electrolysis using renewables). “That’s not going to be possible immediately,” he says. “Initially we plan to use blue hydrogen, with carbon capture as a stepping-stone, and we need to be open and honest about that. At the end of the day, blue hydrogen is better than existing fossil fuels, but it is not as good as green hydrogen, and it is not our end goal.”
Might it be possible to have the best of both worlds? In future, could a hybrid heat pump flip between electricity and hydrogen, depending on electricity demand? That solution is not on the table quite yet.
Although the clock is still running on some of the big questions, such as the financial model to enable large-scale private sector investment in hydrogen, there are investment opportunities today from the impetus to decarbonise buildings.
Greening the energy coming in is likely to lead to a large expansion of battery storage
Greening the energy coming in is likely to lead to a large expansion of battery storage, for instance, to ensure renewable capacity is put to best use. “Large-scale energy storage means excess energy from renewables can be absorbed in peak generating periods, retained, then fed back into the grid,” says Ramos Martin.
Inside the home, there are opportunities too, in energy efficient appliances and insulation. “It’s not just how we heat – it’s how we keep the heat in,” Stathers says. “We already have very efficient forms of insulation and cladding that can bring a building up to almost passivhaus standards, cutting the requirement for energy dramatically. We can do a lot more.”
Research is now concentrated on climate-friendly materials that do not include commonly used polystyrene or polyurethane, both produced from crude oil. These changes are just the beginning, but the transition will not be delivered without a step change in understanding and reskilling.
“In the UK, there are around 130,000 registered gas installers, but only 1,000 registered to install air source heat pumps,” Dixon notes. “Until the supply chain changes, and until we upskill, we will not be able to deliver the change needed. It is a hurdle and an enormous opportunity at the same time. If we do it right, there is a chance to create meaningful jobs with longevity.”
Geology and history have influenced the way energy networks have evolved
Navigating to a lower carbon world is not easy, and there are intriguing geographical and cultural differences shaping the agenda. Both geology and history have influenced the way energy networks have evolved, and they are impacting how lower carbon choices are being framed.
“Each country has distinctive circumstances, and so have different cities,” says Ramos Martin. “We know from consumer trials that energy choices are not just about money. A successful transition is going to need a sensitive approach to these factors. We need to change how our buildings are run, but we also need to make the choices easy for people.”